I want to invest in companies direct through retail bonds, is there a way to check their credit rating?

I am interested in investing in companies directly through retail corporate bonds but want to make sure I am doing all the research I need to into how likely they are to go bust.

Is there a website or place where I can look up individual company’s credit ratings? What in a company’s accounts or on their market data pages should I be looking for to assess their ability to pay and likelihood of default? And is there anything else I should also be considering when looking at bonds?

Checking up: How can retail bond investors look into a company's creditworthiness

Simon Lambert, This is Money editor, replies: Retail bonds remain a niche area of investing but they have caught investors’ attention since they were launched with the London Stock Exchange’s Order of Retail Bonds market, known as Orb.

They offer investors the opportunity to buy directly into bonds and get paid interest for lending money to companies. The bonds can be bought when they are first issued and then traded second-hand.

Bonds involve lending a company a chunk of money, in return for which they will pay you interest, known as a coupon, and at the end of the term they will return the sum that you initially lent them.

Previously, for most small investors the only way to tap into corporate bonds was through a fund. This carries the advantage of spreading risk, but also involves a fund manager buying and selling to try and turn a profit.

Many retail bond investors that we have spoken to say that rather than dipping in and out of bonds for capital gain, they simply plan to hold them until maturity and collect the interest.

Investors attracted to retail bonds need to be aware of a few essential things:

Firstly, their investment is dependent upon a company’s solvency. If it goes bust they can lose their money, this is an investment not to be confused with a protected fixed rate savings bond.

Secondly, when interest rates start to rise the coupons on existing bonds will look less attractive, this could leave them trading at a lower value and mean that if you wanted to sell out early then you may not get back all the money you put in.

Finally, don’t put all your eggs in one basket. Retail bond investors should ideally hold a balanced portfolio of bonds spread across different companies that do different things. Investors should also not confuse retail bonds with non-tradeable mini-bonds and crowdfunding schemes.

So how can you investigate a bond further, we asked an expert to explain.

Patrick Gordon, senior investment strategist and head of fixed income, Killik & Co, says: Any investor in retail bonds must understand that as with all investments there are risks involved. Careful corporate credit selection and portfolio diversification is therefore important.

Although some retail bonds may be rated by the major credit rating agencies, there are many that are not rated. Where rated, the rating at the time of issue should be reflected in the documentation (Prospectus or Final Terms), which is normally available on the London Stock Exchange website.

Note, however, that the credit ratings can change and the documentation will only reflect the rating on the bond at the time of issue. The current credit ratings may be available on the company’s website in the Investor Relations section.

It’s important to be able to ascertain the issuer’s capacity to service interest payments, the strength of its balance sheet and its cash flows.

Various financial ratios, including interest coverage (by how much are the interest payments covered by the company’s earnings and cash flows), leverage (how much debt is there relative to the company’s earnings and cash flows), or gearing (how much debt is there relative to equity in the business) should form part of this assessment.

An investor should also look at the track record of the company, and how it has coped with previous adverse market conditions.

It is also important to assess the terms of the individual bond; how it ranks in the company’s capital structure, its level of subordination, strength of the covenants, and the collateral (if available) among various other factors.

Investors should also watch interest rates and keep a close eye on duration (bond’s price sensitivity to changes in interest rates). Investors should be compensated via a higher coupon for additional risk.

The financial information required for the credit analysis along with the terms of the individual bond can be found in the bond prospectus and the Final Terms, and the financial statements usually available on the company website.

We would encourage investors to read the prospectus, and particularly the section that covers risk factors, before investing in a corporate bond.

FUND JARGON BUSTER

The investment industry's world of abbreviations...Acc: Accumulation - any income generated by the fund like dividends or interest is automatically reinvested.Inc: Income - any income generated is distributed by the fund instead of being reinvested. Dis: Distribution - any income generated is distributed by the fund instead of being reinvested. R: Retail - the fund is aimed at ordinary investors. I/Inst: Institutional - the fund is aimed at corporate investors like pension funds. A, B, M, X etc: Different fund houses use letters for different things. Check with them what they stand for. NT/No trail: Some fund houses use this name on clean funds which carry no commissions for financial advisers, supermarkets or brokers, just the fee levied by the fund manager. But other fund houses use different letters - I, D or Y, for example - so you need to find out for yourself which are clean funds. Gr: Stands for gross. GBP/£: Fund denominated in pounds. EUR: Fund denominated in euros. USD/$: Fund denominated in US dollars. Compiled with online stockbroker The Share Centre